Alameda County SBDC Cal State East Bay - Oakland September 20, 2017

Transcription

1 Effective Tax Strategies for New Businesses Alameda County SBDC Cal State East Bay - Oakland September 20, 2017

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11 Effective Tax Strategies for New Businesses SEPTEMBER 20, 2017

12 Information and materials provided in this presentation is intended for reference only. As the information is designed solely to provide guidance to the participants, it is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations. Although reasonable efforts are made to ensure that the information provided is accurate, the speaker makes no warranties, expressed or implied, on the information provided. The participant accepts the information as is and assumes all responsibility for the use of such information.

13 Topics we will discuss today: Choice of form of entity Accounting periods Accounting methods Business start date implications How to treat organization costs How to treat start-up expenditures

14 Choice of form of entity Business Entity Types Sole Proprietorship General Partnership Limited Partnership Limited Liability Partnership Husband & Wife Jointly-Owned Business Limited Liability Company C Corporation S Corporation Publicly Traded Partnership Nonprofit

15 Sole Proprietorship No formal documents required to be filed with the California Secretary of State. Easiest one to form Business License Fictitious Business Name (if applicable) Personal income tax returns (1040/540) Schedule C Self employment tax (15.3%) Personally liable for debts & obligations of business No franchise tax

16 Partnerships Formation Partnership agreement Business License Fictitious Business Name (if applicable) Partnership income tax returns (1065/565) K-1 flows to personal income tax returns (Schedule E, page 2)

17 General Partnership No California Secretary of State filing requirement Optional: Register a General Partner by filing a Statement of Partnership Authority (Form GP-1) Self employment tax (15.3%) on trade or business income Joint and several liable for debts & obligations of the partnership No franchise tax

18 Limited Partnership Required to file a Certificate of Limited Partnership (Form LP-1) with the California Secretary of State General Partners Joint & several liable for all partner debts & obligations Self employment tax (15.3%) Limited Partners Passive investors Limited liability up to their capital contribution $800 CA Annual tax

19 Limited Liability Partnership Required to file a Application to Register a Limited Liability Partnership (Form LLP-1) with the California Secretary of State Pertains to attorneys, accountants, architects, engineers, and land surveyors Not liable for partner liability (CA) Limited liability for acts of other partners but not their own $800 CA Annual tax Insurance Requirements Considered general partners Self employment tax (15.3%)

20 Husband/Wife Jointly-Owned Business Considered partners in a partnership Self employment tax (15.3%) Check the Box regulations Can elect to be a disregarded entity (Schedule C) IRS Form 8832, Entity Classification Election

21 Limited Liability Company Formation Operating Agreement Business License Required to file with the CA Secretary of State Articles of Organization (Form LLC-1) Statement of Information Limited liability for all members $800 CA Annual Tax (CA Form 568) CA gross receipts fee when reach $250,000

22 Limited Liability Company Consists of LLC member managers and LLC members LLC member managers subject to self-employment tax (15.3%) Single member LLC = Disregarded entity=schedule C & CA Form 568 Two or more members=partnership (1065/568) Check the box regulations Elect C Corporation IRS Form 8832, Entity Classification Election

23 C Corporation Formation Corporate Bylaws Business License Minutes of First Meeting Stock Certificates Required to file with the CA Secretary of State Articles of Incorporation Statement of Information Limited liability

24 C Corporation Separate taxable entity (1120/100) $800 CA minimum tax Graduated income tax rates (15% first $50,000 net income) Double taxation Qualified dividends taxed at capital gains rates made permanent Reasonable compensation & fringe benefits Shareholder leases if arms length transaction Accumulated Earnings Tax > $250,000

25 C Corporation Not good for Professional Service Corporations (PSC) Flat 35% tax rate Doctors, lawyers, engineers, architects, accountants, actuaries, performing artists, and consultants if substantially all stock held by employees or retirees (directly or indirectly) Can elect fiscal year end First-year-free rule for CA Exempt from $800 CA minimum tax Net income still taxed at 8.84% though

26 S Corporation Formation & required CA Secretary of State filing = Same as C Corporation Election to be a S Corporation (IRS Form 2553) Limited Liability $800 CA minimum tax CA 1.5% entity tax if > $800 No self employment tax S Corporation income tax returns (1120S/100S) and K-1 flow thru First-year-free rule for CA Exempt from $800 CA minimum tax Net income still taxed at 1.5% though

27 S Corporation Limitations: No foreign investors No basis credit for entity level debt No increase in basis for debt Effects allowance of losses and distributions Leveraged Real Estate use LLC or LP instead Only one class of stock Maximum of 100 shareholders

28 Accounting Periods Fiscal year Can be used by C Corporations and Nonprofits Elect on first year 1120 tax return on page 1 on top Calendar year All flow thru entities and sole proprietorships

29 Accounting Methods Cash method of accounting Recognize income when received & expenses when paid Can be used if meet Qualifying Taxpayer Exemption Average annual gross receipts for 3 preceding years does not exceed $1 million Accrual method of accounting Recognize income when earned & expenses when incurred GAAP Basis (Generally Accepted Accounting Principles) Lender requires Financial Statement Audit

30 Accounting Methods Have to use the same method of accounting for Books and Tax Return Elect on first year tax return by checking the box next to the accounting method you want to use Sole proprietorship 1040, Schedule C, Line F Partnership 1065, Page 1, Line H S Corporation 1120S, Page 2, Schedule B, Line 1 C Corporation 1120, Page 3, Schedule K, Line 1

31 Business Start Date Implications Before business begins Costs are all on the balance sheet No Income Statement (Profit & Loss) Assets Liabilities Equity Cash Credit Card Payable Owner s Capital (Sole Proprietorship) Inventory Loans Payable Partners Capital (Partnership) Property & Equipment Members Capital (LLC) Vehicles Capital Stock (C & S Corporations) Internet Domain Name Start up Costs Organization Costs

32 Business Start Date Implications When does business begin generally? Depends on the type of business you are in Retail when open your doors Service actually provides services or hold yourself out as ready to provide services Manufacturing begin production activities Leasing open its doors and revenues are generated Publishing (Book publishers, film producers & photographers) when work begins, even if a saleable product is not produced until a later year Distribution (Distributorship-type business) Acquires necessary license, equipment, and begins using those assets

33 Organization Costs Expenses in connection with its incorporation or creation of the partnership (formation) Schedule C = no organization costs Some examples are: Legal Fees in drafting the corporate or partnership documents Accounting fees in organizing the corporation or partnership Fees paid to the state of CA for the formation First year election Deduct the lessor of the amount of organization costs or $5,000 if these costs do not exceed $50,000 and the rest amortized over 180 months (15 years) Elect by attaching a statement to the first tax return by the due date (including extensions thereof)

34 Start-up Expenditures Trade or business expenses that would have been deducted if an ongoing business Some examples are Investigating a new business Creating a business Activity before business begins First year election Deduct the lessor of the amount of start-up expenditures or $5,000 if not over $50,000 and the remainder amortized over 180 months (15 years) Elect by attaching a statement to the tax return by the due date of the return (including extensions) Start-up Costs in the other expenses section of the income tax return